Good morning. My name is Stephen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the UFG Insurance Second Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. I will now turn the call over to Randy Patten, AVP of Finance and Investor Relations.

Good morning, everyone, and thank you for joining this call. Earlier today we issued a news release on our results. To find a copy of this document please visit our website at ufginsurance.com. Press releases and slides are located under the Investor Relations tab. Our speakers today are Chief Executive Officer, Randy Ramlo; Michael Wilkins, our Chief Operating Officer; and Dawn Jaffray, Chief Financial Officer. Please note that our presentation today may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The Company cautions investors that any forward-looking statements include risks and uncertainties and are not a guarantee of future performance. These forward-looking statements are based on management's current expectations, and we assume no obligation to update them. The actual results may differ materially due to a variety of factors, which are described in our press release and SEC filings. Please also note that in our discussion today we may use some non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP measures are also available in our press release and SEC filings. At this time I'm pleased to present Mr. Randy Ramlo, CEO of UFG Insurance.

Thanks, Randy. Good morning, everyone, and welcome to the UFG Insurance second quarter 2018 conference call. Earlier this morning, we reported consolidated net income of $0.01 per diluted share and adjusted operating loss of $0.03 per diluted share and a GAAP combined ratio of 107.9% for the second quarter of 2018. This compares with net income of $0.12 per diluted share, adjusted operating income of $0.05 per diluted share and a GAAP combined ratio of 107.2% for the second quarter of 2017. Looking at just our property and casualty insurance operations, although our second quarter 2018 net income was comparable to second quarter last year, with both periods earning $0.01 per diluted share, we know we need to continue our efforts at improving our core results. In both periods, we had an elevated level of losses. However, the composition of these losses in each period is different. In the second quarter of 2018, losses were driven by an increase in severity of non-catastrophe losses as compared to the same period of 2017, which experienced catastrophe losses above our historical averages. Mike will discuss our operational results in more detail in a few minutes. Moving on to expenses. Our expense ratio was higher at 34.3% in the second quarter of 2018 as compared to 30.3% in the second quarter of 2017. As we mentioned in previous conference calls, the increase in the expense ratio is primarily split between two items. First, we have invested in our multiyear OASIS Project to upgrade our underwriting technology platform, to modernize our analytics capabilities and enhance decisions and productivity. As a reminder, we anticipate the OASIS Project will add approximately one to two points to the expense ratio annually for the duration of the project. Second, since our commercial and personal auto lines have had…

Thanks, Randy, good morning, everyone. As Randy mentioned our second quarter 2018 results were impacted by an increase in severity of non-catastrophe losses, which we define as losses greater than $500,000. This increase in severity of losses was primarily in other liability and workers' compensation lines of business, of which a number of these were commercial auto liability related claims. We've had some improvement in our commercial auto loss ratio in the first half of 2018 compared to prior year, but we remain unsatisfied with the level of our improvement. On a positive note, we are seeing a decrease in frequency of claims in our commercial auto book and a decrease in our exposure units. However, the improvement is somewhat muted by an increase in severity of bodily injury claims overall. We remain committed to risk-control initiatives to improve the performance of our commercial auto book. As we have discussed the past few quarters, we continue to focus on profit-driven strategies, targeted at improving the risk we underwrite, including expanding our reach with risk-control requirements, stricter underwriting guidelines and ensuring we are targeting adequate rates for the exposure. Our enterprise and analytics team continues to refine models designed to provide more insights in the underperforming commercial auto accounts and where rates increases are needed. In 2018, catastrophe losses for the second quarter and year-to-date were below our historical averages. During the second quarter, we experienced catastrophe losses of $15.1 million or 5.9 percentage points of the combined ratio as compared to our historical averages of 10.8 percentage points of the combined ratio. Year-to-date, catastrophe losses were $18.5 million or 3.7 percentage points of the combined ratio. Looking forward to third quarter, we know we have exposure to two catastrophe events, the California Carr wildfire and the July 19 tornadoes in…

Thanks, Mike, and good morning, everyone. For the second quarter of 2018, consolidated net income was $157,000 compared to $3 million in the second quarter of 2017, which included net income from our discontinued Life business of $2.9 million. Year-to-date, consolidated net income was $45.9 million compared to $22.9 million year-to-date in 2017. As a reminder, the year-to-date consolidated net income includes a onetime after-tax gain of $27.3 million associated with the sale of United Life Insurance Company and the first quarter net loss of $1.9 million from our discontinued Life business. Looking at only property and casualty insurance operations results. For the second quarter of 2018, net income was comparable to the second quarter of 2017 with $157,000 of net income compared to $109,000 reported in the second quarter of 2017. Year-to-date in 2018, net income increased to $20.5 million compared to $18.7 million year-to-date in 2017. In both periods, in the second quarter and year-to-date in 2018, our net premiums earned increased 4.7% and 4.2%, respectively, compared with 2017. As mentioned previously, with our continued focus on profitable growth initiatives and achieving rate increases, we estimate our growth and premiums for 2018 will be in the low end of the range of our guidance of 4% to 6% growth. Net investment income increased 42% to $17 million in the second quarter of 2018 and increased 24% year-to-date 2018 to $31 million compared to the same periods in 2017. The increase in net investment income for the quarter and year-to-date was driven by an increase in invested assets and the change in value of our investments in limited-liability partnerships and not due to a change in our investment philosophy. The valuation of these investments in limited-liability partnerships varies from period to period due to current equity market conditions, specifically…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Paul Newsome with Sandler O'Neill. Please go ahead.

Good morning, everyone. I was hoping, and I apologize a little bit ahead of time. I was having some phone problems here, so I may have cut out a few times and missed some things, but I was hoping you could talk a little bit more about the products and why the business that deteriorated on the year-over-year basis outside of the commercial auto insurance business. It looks like there was net improvement in commercial auto, so that, at least on a year-over-year basis, that would suggest to me that most of the year-over-year deterioration, especially if you exclude catastrophe losses, is someplace outside of that book of business. Is that fair, and can you talk about those products a bit?

Paul, this is Mike Wilkins. I'll take a shot at that. You know, if you look at the exhibit in our press release on the back it has the results by line, and you'll see most of the lines of business year-to-date have shown some improvement. One that hasn't is general liability, and we've had some - I think we mentioned in our comments that we've seen some severity there, a few large claims. The other thing is last year, if you look at our loss ratio, it was in the 20s both for the three-month and six-month periods. This year we were 50.5 for the three months ended June 30th, and we're 42.0 for the year, so still not a disaster, but a big increase from a year ago. And that's primarily what drove the lack of progress in our core loss ratio. I think you said we deteriorated. I think we were about flat in the core loss ratio this year to last year.

The large losses, is there anything that suggests that they are unusual in nature or not unusual in nature?

Well, I would say that they were random. They weren't any 1 class or region. We did note that we saw several of those that were commercial auto related. So even though they may be were impacting other lines of business, the root of the loss was a commercial auto accident.

Paul, this is Randy. One other area we seem to be seeing more and more of is adverse court decisions. We've had several of the large auto losses had a distracted driver element to them, and those don't do very well if they end up going to court.

Okay. I know you touched on the investment income increase. Is this a fair run rate as we sit? Was there some further investing going to happen because of the cash flow from the Life operation? Or obviously, alternatives bumped that around. Should we think of the NII, the net investments in the quarter as a reasonable run rate?

Yes, I believe that it's a reasonable run rate. This is Barrie. The increase in the invested assets with the sales of the Life Company and our LLCs did a lot better this quarter too, as Dawn pointed out. And we haven't changed our investment philosophy with that. So I think this is pretty normal.

Great. I've got a couple questions, but I'll re-queue in case there is somebody else who wants to ask a question.

[Operator Instructions] And our next question comes from Eric Leifson with Eric Leifson Associates.

Yes, good morning. This question is for Randy. He mentioned the OASIS project and the increased expenses related to that project. So my question is what is the anticipated duration of this project and what are the anticipated long-term benefits that will be derived from this?

So I may differ a little bit of this to Mike Wilkins. He is a lot more familiar with this than I am. But it kind of - overall, it's a five-year project. We have 4 left. We actually had our - one of our benchmarking people come in earlier this week. And these major legacy systems usually take five to seven years, so ours is at the low end of that, which we're thankful for. It's moving along, as we expected. Our past policy-processing system was probably 25 years old. So it had a bit of bailing wire and duct tape on it. And the new system, and Mike can kind of add to this, but a lot more streamlined. We can add a lot more analytics features. So underwriters will have information right at their fingertips. On a policy level, better management of data. Mike, you got any more comments on that?

Yes, just expanding on what Randy said, I think the big advantage for us - we use analytics today, but our analytics today isn't integrated into our policy-processing system. So the underwriters, it's a separate operation for them to go get the analytics information and then incorporate it into their underwriting process. The new system will tie it all together and provide guideposts for them on pricing and attractiveness of the business, quality of the business as they go through the process. Of course, productivity is another big area that we look to improve, underwriting policy-processing expenses, underwriting expenses, things like that. So it's a big project, and probably overdue that we tackled that.

Thank you.

[Operator Instructions] And showing no further questions, this concludes our question-and-answer session. I'd like to turn the conference back over to Randy Patten for any closing remarks.

This now concludes our conference call. Thank you for joining us, and have a great day.